Fed Keeps Benchmark Interest Rate, But Still Expects Increase

Federal Reserve Board Chair Janet Yellen told reporters Wednesday that although the Fed is holding its benchmark interest rate steady, she still expects it to raise the rate this year.

Alex Brandon
/ AP

Originally published on September 21, 2016 5:47 pm

Chair Janet Yellen and her colleagues at the Federal Reserve didn't surprise anyone when they announced Wednesday they were not raising their benchmark interest rate. Fed policymakers decided to keep the federal funds rate in a range between one-quarter and one-half percent. That's where it's been since last December when the Fed lifted the rate a quarter of a point from near zero — where it had been left for seven years as the central bank tried to support growth coming out of the Great Recession.

Since lots of consumer and business rates are linked to the federal funds rate, holding steady means car loans, many variable rate mortgage loans, the prime rate for business lenders — all those rates won't go up either.

But even those who expected no move from the Fed wondered how it would justify standing pat. After all, back in December the Fed had signaled it was likely to raise rates a quarter of a point four times in 2016. So far there have been no rate hikes ... none.

That's despite signs that economic growth is improving and job growth has rebounded, averaging 180,000 a month recently. There's also evidence that threats to U.S. growth from global instability have eased. Yellen even said the case for a rate increase has "strengthened." So why is the Fed waiting?

Yellen's answer at Wednesday's post-meeting news conference was that there is no inflation threat, so there is no hurry; and she said that if the Fed holds off raising rates maybe even more people will find work.

Yellen defended that view by pointing out that despite the robust job growth in recent months, a number of measures in the labor market haven't improved. For instance, the unemployment rate has remained at 4.9 percent for the past three months, and that's up from 4.7 percent in May. Also, Yellen points to data showing there are still lots of people with part-time jobs who would prefer full-time work.

Yellen says this makes her believe that people who've been discouraged are returning to the labor force because robust job growth has convinced them, "Hey, maybe I've finally got a shot at getting a job." As they move back in the labor market and start looking for work they're counted as unemployed. And Yellen thinks that has kept the unemployment rate at 4.9 percent despite robust job growth.

Three of her colleagues on the Fed dissented from the decision to hold rates steady. Yellen threw them a bone, saying she expected the Fed will still raise rates once this year. That's most likely to come when the policymaking Federal Open Market Committee meets in December. The committee does have a meeting in November just before the presidential election, but a rate hike seems highly unlikely because it might be seen as affecting the vote. That said, Yellen defended the Fed's independence again Wednesday, saying its decisions are made without political considerations.